Some market observers estimate that approximately 20% of occupied residential properties – around 5 million households in total – are made up of privately rented accommodation.
Yet, when asked to undertake due diligence on occupied residential property, it is more common to encounter deficient and incomplete tenancy arrangements than those that have been properly established. The purpose of this article is to remind existing and prospective landlords of the fundamentals of an Assured Shorthold Tenancy (AST) and to highlight certain key issues to keep in mind when dealing with tenanted residential property.
An AST is a type of assured tenancy that enables landlords to let a residential property whilst retaining the right to retake possession once the term comes to an end. The Housing Act 1988 (HA 1988) established that in order for a tenancy to qualify as an AST, it must satisfy the following requirements:
- the tenant or tenants must be an individual or individuals;
- the tenant, or at least one of the tenants if more than one, must occupy the property as their only or principal home; and
- the tenancy must not qualify for one of the exceptions in Part 1 of Schedule 1 to the HA 1988 – for example, the rent must not exceed £100,000 per annum.
Most tenancies granted since 28 February 1997 will automatically be an AST, unless the landlord has served a notice on the tenant stating otherwise. If a notice is served, the tenancy is likely to be an assured tenancy.
Unfair AST terms
When preparing a draft AST and agreeing its terms, landlords should be aware that the Consumer Rights Act 2015 (CRA 2015) may apply to ASTs created on or after 1 October 2015 where they are entered into between a supplier acting in the course of a business – such as a professional landlord – and an individual who is acting outside the course of their business – such as an individual occupier.
In situations where the CRA 2015 does apply, the courts will not enforce a term that is deemed to be “unfair” and the meaning of this designation is determined on a case by case basis, by reference to the context of the transaction and the remaining terms of the AST.
In 2005 the Office of Fair Trading (OFT) issued guidance on the terms that are likely to be assessed as unfair and, although the guidance has subsequently been withdrawn, the examples given in the OFT’s commentary provide a useful indication of the nature of the terms that are likely to fall foul – including provisions that:
- enable the landlord or their agent to determine absolutely whether repairs or decorations have been satisfactorily undertaken;
- enable the landlord to access or enter the property excessively or without sufficient grounds to do so;
- enable the landlord to withdraw or temporarily suspend the supply of a substantial benefit to the tenant contained in the AST; or
- prevent the tenant from keeping any pets without reasonable cause.
Landlords should therefore exercise care when preparing ASTs and avoid incorporating any terms that may be in breach of the CRA 2015 and render the AST unenforceable, either in part or in full.
For ASTs created on or after 1 October 2016 the Deregulation Act 2015 (DA 2015) and the Assured Shorthold Tenancy Notices and Prescribed Requirements (England) Regulations 2015 (AST Regulations) require landlords to supply to tenants certain prescribed information, including:
- an energy performance certificate (EPC);
- a gas safety certificate;
- a copy of the Ministry of Housing, Communities & Local Government “How to Rent” checklist; and
- if a deposit has been paid – any additional information required by the landlord’s chosen tenancy deposit scheme, within 30 days from the date of receipt of the deposit.
If a landlord has failed to supply the tenant with the requisite prescribed information then they will be prevented from serving a notice seeking possession of the property under section 21 of the HA 1988 (Section 21 Notice).
Landlords should therefore endeavour to comply with their statutory obligations under the DA 2015 and the AST Regulations concerning the provision of prescribed information to ensure that they are not subsequently subject to potentially costly consequences.
EPCs and MEES
Not only are landlords under an obligation to provide tenants with an EPC but that EPC must also comply with the Minimum Energy Efficiency Standards (MEES) required by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (EPC Regulations), unless an exemption applies.
From and including 1 April 2018 landlords have been unable to grant a new tenancy or extend or renew an existing tenancy of residential property unless it has an EPC rating of band “E” or above, as a result of the EPC Regulations.
The landlord must provide the EPC to the tenant on the earliest of:
- the point at which written details of the property are provided to the prospective tenant;
- the point at which the prospective tenant visits the property; or
- otherwise, at the earliest opportunity.
Landlords should therefore ensure that where new or renewed tenancies are anticipated, they review the EPC rating of their portfolios and ensure that they meet the energy efficiency rating required by the MEES.
Prospective landlords considering the acquisition of tenanted residential property should also be mindful of these requirements and either ensure that the target property is compliant or that sufficient consideration has been given to the cost and responsibility for bringing the property up to the minimum EPC rating.
Landlords will often require tenants to pay a deposit to protect against the tenant’s failure to pay rent or to comply with the provisions of the AST, such as an obligation to repair and redecorate at the end of the term.
The Housing Act 2004 (HA 2004) established that, from 6 April 2007, landlords who receive a deposit on the creation of a new AST are under an obligation to incorporate certain prescribed wording into the AST and to join an authorised Tenancy Deposit Scheme (TDS).
According to the HA 2004, the purpose of a TDS is to safeguard the tenant’s deposit until the end of the tenancy – subject to any legitimate withdrawals that the landlord may be entitled to make – and to enable disputes arising in connection with that deposit to be resolved.
There are two types of TDS that the landlord is entitled to choose from:
- custodial TDS: this type of scheme is managed by an administrator to whom the landlord pays the deposit within 30 days of receipt from the tenant – the administrator then retains the deposit until the AST comes to an end and, once any deductions have been made, returns the deposit to the tenant; and
- insurance TDS: this type of scheme enables the landlord to retain the deposit by paying for an insurance policy to underwrite the deposit and reimburse the tenant should the landlord improperly retain all or part of it.
As stated in the Initial requirements section above, landlords must comply with their chosen scheme’s initial requirements and provide the tenant with the prescribed information within 30 days of receipt of the deposit.
Broadly speaking, the prescribed information comprises general details of the scheme as well as specific information about the deposit and the AST that it relates to. The HA 2004 requires the prescribed information to be given to the tenant and to “any relevant person” – including any party who has paid the deposit on behalf of the tenant, such as a parent or guardian.
If the landlord fails to comply with these obligations, whether under a custodial or an insurance-backed scheme, there are two principal consequential sanctions that may arise:
- the landlord may not be able to serve a Section 21 Notice to recover possession of the property; and
- the landlord may be required to repay the deposit and to pay a fine to the tenant of between one and three times the amount of the deposit.
Landlords should therefore ensure that, where deposits are received in connection with an AST, they comply with their statutory obligations relating to the provision of prescribed information and the protection of the tenant’s deposit in an approved TDS.
Ending an AST
The HA 1988 established two procedures for terminating an AST:
- service of a notice under section 8 of the HA 1988 (Section 8 Notice) claiming possession of the property on the grounds set out Schedule 2 of the HA 1988 – for example, where the landlord intends to use the property as their main residence; or
- Service of a notice under section 21 of the HA 1988 (Section 21 Notice) if the fixed term has come to an end and the landlord has the right to regain possession of the property.
In either case, the landlord is not permitted to evict the tenant until a court order has been obtained.
In cases where the landlord has the benefit of a break clause in the AST, the landlord will need to ensure that they comply with Section 21 Notice procedure as well as any preconditions required to exercise the break.
Similarly, landlords seeking to rely on forfeiture provisions – such as those that enable the landlord to terminate for non-payment of rent – will also need to proceed with caution. To rely upon a forfeiture provision, the landlord will need to follow the Section 8 Notice procedure and ensure that the AST has been drafted in a way that enables them to do so.
Landlords should therefore be alert to the various grounds that may prohibit them from terminating an AST, check that the AST itself is properly drafted and all prescribed information provided, and ensure that the practical implementation of the applicable procedure for bringing that AST to an end is validly carried out.
Whilst we are unable to cover the full range of requirements and regulations relating to the grant, ongoing administration, and termination of ASTs – as it is a complex and comprehensive area of law – the purpose of this article has been to highlight the fundamental considerations when letting residential property on an AST and to identify certain key issues of which landlords need to be aware.
Investors intending to acquire or divest themselves of tenanted residential property would be well advised to consult a suitably qualified solicitor to ensure that adequate due diligence is undertaken into their proposals and to identify and attempt to mitigate any potentially adverse financial consequences that may undermine their underlying investment.
Fladgate would be well placed to provide such advice.